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The Great Shift: Manufacturing To Services

In honor of Labor Day, which was signed into law as a national holiday in 1894, I spent some time this morning studying a topic I’ve occasionally mentioned: The shift in the United States from a manufacturing to a services economy.

The Department of Labor’s Bureau of Labor Statistics has monthly data on employment by industry categories reaching back to 1939. The first chart below is an overlay of the compete series of employment numbers for the two major categories, manufacturing and services.

When I say major, I’m referring to the complete domination of the labor market by these two industries. To illustrate this fact, I’ve also included total nonfarm employment and a dotted line showing the total of the two industries.

In 1939 service industries employed more people than manufacturing by a ratio of 2.1-to-1.0. But that ratio was soon to change. For a clearer picture of the relative growth of manufacturing and services, the next chart illustrates just that: The cumulative growth of the two series, along with total nonfarm employment.

During WWII, manufacturing employment rose dramatically, but it began returning to its pre-war pattern after the war ended. Thereafter, manufacturing employment has had a complex history with a peak in the late 1970s and a secular decline thereafter. Here are some observations about manufacturing and services over the past seven plus decades:

Manufacturing is far more sensitive to the business cycle. Compare, for example, the relative behavior of manufacturing and services relative to the recession bars.

Growth in services began accelerating in the 1960s and accelerated at an increasing rate after the double-dip recession in the early 1980.

Manufacturing accelerated at a slower pace in the 1960s and then oscillated around a flat line in sync with the four recessions from 1970 to 1982.

Manufacturing employment peaked in June 1979. It never recovered from the double dip recession of 1980-1982.

The spring of 1998 was the an interim high for manufacturing jobs, but with the recession of 2001 began a 35% decline in jobs from the 1998 peak to the trough (so far) in December 2009. Manufacturing has essentially flatlined over the past 21 months.

Services industry employment began leveling off with the onset of the 2001 recession. Growth began accelerating again in 2004, but the rate of growth was well below what we saw in the 1980s and 1990s.

Services employment hit its all-time peak in January 2008, the second month of the Great Recession. Services employment is slowly improving, but it remains about 2.6% below the 2008 peak.

In 1939 the services to manufacturing employment ratio was 2.1:1. Today it is 9.6-to-1.

About The Author

My original dshort.com website was launched in February 2005 using a domain name based on my real name, Doug Short. I’m a formerly retired first wave boomer with a Ph.D. in English from Duke. Now my website has been acquired byAdvisor Perspectives, where I have been appointed the Vice President of Research.

My first career was a faculty position at North Carolina State University, where I achieved the rank of Full Professor in 1983. During the early ’80s I got hooked on academic uses of microcomputers for research and instruction. In 1983, I co-directed the Sixth International Conference on Computers and the Humanities. An IBM executive who attended the conference made me a job offer I couldn’t refuse.

Thus began my new career as a Higher Education Consultant for IBM — an ambassador for Information Technology to major universities around the country. After 12 years with Big Blue, I grew tired of the constant travel and left for a series of IT management positions in the Research Triangle area of North Carolina. I concluded my IT career managing the group responsible for email and research databases at GlaxoSmithKline until my retirement in 2006.

Contrary to what many visitors assume based on my last name, I’m not a bearish short seller. It’s true that some of my content has been a bit pessimistic in recent years. But I believe this is a result of economic realities and not a personal bias. For the record, my efforts to educate others about bear markets date from November 2007, as this Motley Fool article attests.